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What are Brexit’s implications for the UK payments industry?

23.07.2017

In recent developments since the UK voted to leave the European Union (EU) on June 23rd 2016, the Government has introduced the EU (Withdrawal) Bill, but numerous journalists have dubbed it as the “Great Repeal Bill”. What likely impact will this have on the UK payments industry?

The Bill, which was introduced in the Queen’s Speech in June, is designed to repeal the 1972 European Communities (EC) Act, which brought Britain into the EC and resulted in European law proceeding laws approved in the UK Parliament. It will also end the jurisdiction of the European Court of Justice.

However, to prevent a disruption to British businesses, current EU legislation will be copied into UK domestic law. The Government believes this legislation is vital to prevent disruption to individuals and businesses in the UK. The UK Parliament will have the freedom to amend, repeal and improve laws as necessary. Preserving EU rules and regulations is also meant to support trade discussions with the EU because Britain will already meet all its product standards.

There have also been reports that the Cabinet is united in its support for a ‘transitional deal’ after Britain formally leaves the EU on April 2019. Like the Great Repeal Bill, this is designed to prevent a disruption to individuals and businesses. It could also result in the UK retaining membership of the Single Market for a brief period to enable continued access to EU markets.

These proposed measures could impact the payments industry in numerous ways. An example of EU legislation that could be affected by Brexit is the Payment Services Directive (PSD). The PSD was published in 2007 and is a substantial piece of payments legislation. It was designed to:

Create a Single Euro Payments Area (SEPA).

Enforce common standards for terms and conditions.

Regulate payment institutions to enable non-banks and other industries to join the market.

Provide increased consumer protection and transparency.

Establish maximum processing times for payments in euros and other EU currencies, including sterling.

The Payment Services Regulations 2009 implemented the PSD into British law. It was the first EU law to affect sterling payments. However, the European Commission proposed revising legislation after a review in 2012. The Payment Services Directive Two (PSD2) was introduced in July 2013 and legislated in January 2016.

PSD2 was a crucial step in developing a Digital Single Market to ensure the EU’s Single Market was adapted to a modern digital age. All PSPs active in Europe are subject to supervision and appropriate rules, with wide-reaching implications on other institutions like banks.

The good news for the payment industry is that PSD and PSD2 are likely to remain on the statute book after April 2019. Chris Jones at Finextra said certain features of European legislation regarding consumer protection will probably remain because they did not substantially alter existing UK rights. The UK Open Data Initiative is likely to replace PSD2, because the UK Government’s approach to account access is generally more progressive than the EU’s.

A report by Payments UK labelled The UK’s exit from the EU: how could payments be affected? said that our exit from the EU must be smooth from a payments perspective, as there is no detriment for customers and businesses. This is one probable reason as to why the Cabinet are reported to be united on a transitional deal, so that aspects of EU law that benefit UK consumers are protected.

According to the report, other areas likely to be affected by Brexit are the passporting rights UK businesses are entitled to whether they are a member of the EEA and/or the EU. The report states British companies could face numerous licensing regimes after leaving the EU and would, potentially, be subject to local requirements. Passporting rights have played a crucial part in transforming London into a financial hub with pan-European access. Many firms have threatened to relocate to cities such as Paris or Frankfurt since last year’s referendum. The Financial Times reported that HSBC and JP Morgan have considered relocating to Europe.

The Financial Conduct Authority (FCA) has a good relationship with European payments businesses. Transforming the approach to passporting will affect Britain’s foreign activities the most. Numerous UK businesses depend on passporting FCA regulatory licenses. Unless they have acquired licenses in other EU countries, businesses will need to gain new EU regulatory approval to operate across Europe.

Despite this, the UK Government is planning on negotiating new trade deals with emerging economies once it leaves the EU. This will provide new opportunities for the payments industry depending on what types of deals are negotiated post-Brexit. International Secretary Liam Fox has already begun discussions with the US Government on a UK-US trade deal, which President Trump has promised Prime Minister Theresa May “can be negotiated pretty quickly.” As well as ensuring a smooth Brexit to prevent significant disruption to individuals and businesses, it would be wise for politicians to discuss the details of these trade deals so that they are ready to be signed after April 2019. These future trade agreements could provide a host of new opportunities for the payments industry depending on the final outcomes of negotiations.

Another effect Brexit could have on the payments industry that the UK exit report has commented on is SEPA. It said Britain is likely to lose its automatic qualification to be part of the geographical scope of this area. Though there would have to be alternative mechanisms implemented, these could make euro payments to and from the UK costly. The conditions of euro-dominated transactions are likely to be more expensive.

There will be many short-term costs to the payments industry as Britain prepares its EU exit, but with the exciting chances Brexit offers beyond Europe, the UK consumer market, through its innovation, will prepare for these opportunities. Mr. Fox reaffirmed on The Andrew Marr Show that the UK will leave the EU before 2022 the latest. This will enable the consumer industry to adapt to post-EU conditions with minimal disruption and thrive.